EMPLOYEE VS INDEPENDENT CONTRACTOR: What You need to know

The Private Medical Practice Academy

I’m frequently asked about the benefits of hiring employees versus having independent contractors.

Many physicians are under the impression that hiring someone as an independent contractor is going to be less expensive than as an employee. But not so fast. The IRS has rules. The employer is responsible for determining if the new hire meets the criteria. Choose the wrong status and you may be liable for past taxes and the associated penalties.

What does it mean to be an Independent Contractor?

The IRS and many states have adopted common law principles to define an independent contractor. These rules focus primarily on the level of control an employer has over a service or product.

The nature of the work that you expect this new hire to perform also helps to define the employment status. When work is considered integral to the business, it is more likely that the person is an employee.

Another factor that helps define employment status is the method of compensation. If a person is on your payroll and receives a steady paycheck they are an employee.

The Economic Realities Test

The “economic realities test” looks at the dependence of the worker on the business they work for. If a person gains a large portion of their salary from that business, chances are that person qualifies as an employee.

The Right to Control Test

Courts also use the "right to control" test. When an employer controls the way work is carried out and a product is delivered, the relationship between the parties is employer/employee.

Employer Responsibilities
As an employer, your tax liability is determined by your worker's employment status. When a worker is an employee, you are required to pay state and federal unemployment tax, social security tax, as well as workers compensation and disability premiums to your state’s insurance fund. When a worker is an independent contractor, the hiring party is not required to make any of these payments.

The Law Is Clear

Most of the staff that you would hire for your medical practice are most likely going to be employees. I would strongly encourage you to review the IRS guidelines and have a conversation with your CPA prior to hiring any new staff.

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